China’s love affair with high-speed rail is a boon to foreign suppliers—for now

IN SHARP contrast to the usual smooth collaboration between political and business interests in Hong Kong, thousands of protesters are expected to surround the territory's legislative council on January 15th. They are hoping to deter the councillors from approving funding for the final 16 miles (26km) of one of the world's most ambitious infrastructure projects, a high-speed rail network linking one end of China to another. They think it is too expensive, will involve the forced purchase of too much private property and will demolish too much of the territory's heritage.

The same may be true of the rest of the epic project to expand China's rail network by nearly 19,000 miles by 2015, 8,000 of which will be tracks for high-speed trains. But the media, at any rate, portray it as a point of national pride and as a huge stimulus to the economy and employment. While Hong Kong grumbles, nothing is allowed to impede this $750 billion civil-engineering juggernaut on the mainland. Indeed, last year it accelerated and, according to Jiong Shao, an analyst with Nomura Securities, the high-speed portion of this network should be finished by 2012, three years early. Urban metro lines will also expand dramatically from 620 miles to 2,800 over the next ten years, as the number of cities boasting such systems doubles from 11 to at least 22.

The expectation is that China's high-speed rail network will perform the same function as the building of the railways in 19th-century America and President Eisenhower's great national highways project in the 1950s. The Chinese authorities hope that shrinking journey times will both spread economic development more evenly and bind together potentially fissiparous regions.

How it will be paid for is not entirely clear. There are rumours that sections of the railway will begin to be sold in public flotations as early as this spring, though the government will retain large amounts of the associated debt. Fares do not seem high enough to cover the costs of construction, but may yet prove too expensive for the masses. For all its embrace of market economics in the last couple of decades, China's great railway bonanza owes much to the old style of command and control. The approach is “build it and they will come”.

The railway ministry in Beijing has dictated the plans, state-owned banks have provided the loans and a collection of companies owned by the central and provincial governments are responsible for making it all happen. China Railway Engineering Corporation is the country's biggest construction enterprise. China Railway Construction Corporation is its second-biggest and its largest contractor. Both firms used to be part of the People's Liberation Army and still employ lots of former officers in their upper ranks.

But there is still money to be made, especially by the foreign firms that have provided the technology to allow China's trains to overtake Japan's bullet trains and France's TGV. Bombardier Sifang, a joint venture between Canadian and Chinese trainmakers, won a $4 billion contract in September to produce 80 trains capable of achieving nearly 240mph with a new energy-efficient system for propulsion and control. Siemens, a German engineering giant, is involved in a similar deal worth around $1 billion. Kawasaki Heavy Industries, a Japanese trainmaker, is licensing a Chinese firm to build 140 of its trains for $6 billion. Alstom, Hitachi and others have also secured business. IBM, meanwhile, is setting up a unit in China with 400 employees to cater purely to the country's appetite for software and services to manage its rail network efficiently.

What foreign companies working with the Chinese understand is that in order to win these contracts they must transfer know-how by the shovelful. As a result, within a few years China may well have the most advanced railway industry in the world. The firms that are gaining this expertise have their hands full for now meeting domestic orders, but they are open about their desire to export their new-found expertise. If they are successful, China may earn returns on its investment abroad as well as at home. The foreigners providing the equipment, however, may find that today's returns have come at the expense of tomorrow's.